BILL ANALYSIS
SENATE PUBLIC EMPLOYMENT & RETIREMENT BILL NO: AB 1856
Lou Correa, Chair Hearing date: June 14, 2010
AB 1856 (Fong) as amended 6/07/10 FISCAL: YES
CALPERS SERVICE CREDIT PURCHASE: SUSPENSION OF AFTER-TAX
PAYMENTS
HISTORY :
Sponsor: California Public Employees' Retirement System
(CalPERS)
Prior Legislation: none
ASSEMBLY VOTES :
PER & SS 6-0 4/21/10
Appropriations 17-0 5/05/10
Assembly Floor 73-0 5/17/10
SUMMARY :
Would allow a CalPERS member who is making after-tax payments
to purchase service credit to suspend payments for a period
of up to 12 months or to cancel prospective payments and be
credited with the amount of service purchased prior to
cancellation.
BACKGROUND AND ANALYSIS :
1) Existing law :
a) allows a CalPERS member to purchase various types of
service credit, such as service prior to membership,
military service, and additional retirement service
credit.
b) specifies that members may pay for service credit
purchases with either pre-tax or after-tax monies,
either in lump sum or in installment payments.
i) Purchases made with pre-tax monies are subject to
state and federal Internal Revenue Code laws and may
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Date: 6/8/10 Page 1
not be altered or discontinued unless the member
separates from employment or retires.
c) requires that the service credit being purchased is
credited in full at the time payments begin.
d) allows members who retire while making installment
payments to continue to have those payments deducted
from their retirement warrants.
2) This bill :
a) allows a member who is purchasing service credit with
after-tax, installment payments to elect to either
cancel the purchase prospectively or suspend the
payments for up to 12 months, after which time the
payments will automatically resume and be recalculated
to include interest due during the suspension period.
b) allows the member to elect to resume installment
payments sooner than 12 months if he or she so desires.
c) prohibits the member from electing another suspension
of payments for three years following resumption of
payments.
d) requires a member who retires during the suspension
period to either pay the remaining balance at retirement
or cancel the remaining service credit purchase. Failure
to do either of these actions will result in automatic
resumption of payments deducted from the retirement
allowance.
e) in the case of prospective cancellation of the
service credit purchase, specifies that the service
credit will be recalculated to give credit for the
amount of service purchased prior to the cancellation
and allows the member, at any time prior to retirement,
to elect to make appropriate payments to purchase the
remaining service credit that was cancelled.
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f) prohibits cancellation of payments for service credit
adjustments required by law or contract, an election
from 2nd Tier to 1st Tier retirement benefits, or
service credit purchases subject to a court order (such
as part of a community property settlement).
g) allows CalPERS to cancel a service credit purchase if
the member has not made installment payments for 12
months and has not elected to suspend payments, in the
same manner and with the same effect as if the member
had elected to cancel the service credit purchase.
FISCAL IMPACT :
CalPERS indicates that the bill will result in no net costs
to either the pension fund or the administration of the
program.
Any cancelled service credit election will be
pro-rated to reflect the payments received and interest
will continue to accrue during a suspension period. Any
resumption of a cancelled election will be calculated
using a present-value calculation method, which requires
the purchase to be cost-neutral.
The suspension and cancellation workload will replace
current workload involved with reviewing requests,
making hardship determinations, explaining cancellation
denials, and handling subsequent 'second opinion'
requests/appeals.
COMMENTS :
1) How are after-tax installment payments different from
pre-tax payments?
After-tax payment plans have been extended under the
authority of the California Code of Regulations, thereby
providing relief by lowering the actual payment amount.
(Example: A member's election of 100 payments is
extendable to the maximum 180 monthly installment payments
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provided by the Code of Regulations).
In some cases after-tax payments have been suspended for a
period (usually 6 to 12 months) when a hardship is claimed
and the member is ineligible for an extension (already at
the 180 month maximum) or is ineligible under the election
cancellation criteria. However, suspension of payments and
election cancellation laws and policies are very limited,
so many members requesting relief do not qualify.
2) Argument in support
According to the sponsor, CalPERS:
In recent years, the number of cancellation requests has
increased with many members citing the declining economy
and financial hardship. Other common reasons include
second thoughts, job change, family obligations, personal
debt, declining health, and early retirements. This
proposal provides a means for the member to obtain the
desired relief from after-tax payments regardless of the
reason and provides CalPERS staff with a process for
providing relief without having to make a hardship
determination.
3) SUPPORT :
California Public Employees' Retirement System (CalPERS)
4) OPPOSITION :
None to date
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